NEG: is it worse than doing nothing at all?

Environment and Energy minister Josh Frydenburg recently told media outlets that after the recent round of COAG meetings, state energy ministers were moving towards the “final design phase in August”, which essentially means time is running out to get the energy policy right.

The ESB has already warned against designing the NEG in a way that requires retailers be vertically integrated to be compliant with the guarantee but it isn’t enough says wholesale electricity retailer Flow Power managing director Matthew van der Linden who says that today’s national electricity market is highly concentrated with large vertically integrated retailers already boasting a large market share.

“This lessens competition and drives up prices for consumers. The ESB has recognised this and in its latest design for the NEG, and has stipulated that these retailers will need to contract centrally cleared trading platforms in order to utilise their own generation to comply with the new reliability and emissions reduction targets. This provides a level of much needed transparency,” says van der Linden.

So what will this suggest for the market if anything? van der Linden says it suggests the ESB is extremely aware of the level of market power held by the gentailers and the need to encourage competition to keep costs down.

“Currently, Australia’s four largest retailers are vertically integrated making them gentailers between them, these gentailers own more than half of the generation fleet in the NEM. When energy prices peak due to market demand, so does the profitability of their assets – they have no incentive to connect customers to market signals.”

“To attract customers, emerging retailers are entering the market with new and innovative ways to buy power. This will bring some much needed competition to the NEM, which has been previously dominated by large retailers.”

van der Linden believes Australia doesn’t need a fixed-rate price saying that the fixed-rates currently paid are based on projected variations in price – whether they happen or not.

“If we look at what is driving these variations in price, it’s usually periods in peak demand. Currently energy users are totally unaware of the impact their power use has on costs and more importantly are not given the tools they need to avoid peak pricing.”

“Customers need to pay for the real price of power. Under wholesale models no one pays for the sheer possibility there may be high demand. As more people respond to market signals demand will be managed more effectively and we will see better pricing.”

“While fixed-rate contracts remain the norm, spot market pricing is obscured and gentailers have no incentive to participate in demand response. A fixed-rate free NEM will give customers visibility of spot market prices and greater agility to contribute to reliability,” said van der Linden.

But without fixed-rate models what would Australia’s energy future look like and would Australians feel more empowered to respond to the signals of the power market.

“Power pricing would have true transparency rather than arbitrary costs forecast on the off-chance there may be a peak demand event. In turn, power prices could be driven down across the board,” says van der Linden.

“Fixed rate contracts obscure the true wholesale prices. Without them in the picture, power prices will have greater transparency and customers will be empowered to respond accordingly.”

“Now more than ever, there are countless opportunities for customers to be smarter about their energy use. New and emerging technology is giving customers greater agility to respond closely to the rhythms of the power market.”

In the first quarter of 2018, van der Linden says the average spot price in Victoria sat 23% below fixed-rate pricing.

“And this was without demand response. If customers were responding to market signals the savings would be even greater. If we want lower prices and greater reliability, we need to give customers greater visibility of wholesale pricing and the right tools to respond to the signals of the market.”

“Under gentailers’ fixed-rate models, peaks in demand for energy directly correlate to increases in power prices for the customer and revenue for the gentailer. Put simply, rather than providing customers with cost saving mechanisms, a gentailer profits directly from the scarcity of supply that is met by its generator.”

“New figures are showing that new solar and wind commitments are set to run past the rate required to meet the Paris target by 2030. While criticism of the NEG has focussed largely on its failure to meet an adequate emissions reduction target, it doesn’t need to spell the end for investment in renewable energy. Australian businesses have an opportunity to support investment in renewable energy and ensure that renewable projects aren’t pushed aside by the NEG,” says van der Linden.

“Corporate power purchase agreements will be crucial to delivering ongoing investment to the renewable energy sector, either by supporting renewable projects that are currently in the pipeline or financing new ones.”